TAMU ACCT 229 - Exam 1 Latest 2023 Already Passed

TAMU ACCT 229 - Exam 1 Latest 2023 Already Passed 3 types of businesses sole proprietorship, partnership, corporation unlimited liability sole proprietorship & partnership limited liability corporation Sole Proprietorship one owner advantage: easy to form separate entity for accounting purposes not a separate entity for legal purposes or tax purposes Partnership two or more owners separate entity for accounting purposes not a separate entity for legal or tax purposes Corporations business incorporated under the laws of a particular state. Advantages: limited liability, continuity of life, ease in transfer of stock (ownership), opportunity to raise large amounts of money by selling shares of stock to a large number of people. 3 types of business activities financing, investing, operating Operating Activities everyday activities -sell inventory, pay employees Investing Activities how you grow your company -buying building, equipment, vehicles, fixtures Financing Activities how you pay for your growth -borrow money: temporary financing -issue stock: permanent 4 financial statements Income statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows What does a balance sheet show? Shows the financial position of a company at a point in time. A = L + SHE Assests what a company owns, or what is owed to a company Laiabilities what the company owes Stockholders Equity ownership. (common stock & retained earnings) Monetary Unity Assumption Only transactions that can be expressed in terms of money can be included in the accounting records Economic Entity Assumption Activities of the business are separate from activities of the owners Time Period Assumption The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the Income Statements for a specific time period. Going Concern Assumption The company will not go out of business in the near future. Not liquidating. Historical Cost Principle record assets at the cost paid to acquire them Full Discloser Principle Provide all information sufficiently important to influence decision GAAP Generally Accepted Accounting Principles. Rules and assumptions under which financial statements must be prepared. (USA). SEC Securities and Exchange Commission. -ultimate authority -THE ENFORCER FASB Financial Accounting Standards Board. -sets accounting standards in the US AICPA American Institute of Certified Public Accountants. -advises FASB. Professional organization for CPAs PCAOB Public Company Accounting Oversight Board. -set audit standards IASB International Accounting Standards Board. -created in 2001. Developed world wide accounting standards IFRS International Financial Reporting Standards. (principle based) -US adoption -many countries currently using Sarbanes-Oxley (SOX) Act (2002) -address the problems with financial reporting after . ALL publicly traded companies and any international companies that trade in the US stock exchange must comply with this law. Key provisions of SOX (management) 1. asses and report the effectiveness of the company's internal control structure and procedures. 2. code of ethics established and reported. 3. if the financial statements are inaccurate or incomplete SOX requires the CEO and CFO to certify annual financial statements. 4. Firms must provide a mechanism for anonymous reporting of fraudulent activities (whistle-blower protection). Key provisions of SOX (board of directors) 1. Composition of the Board of Directors requires some directors to be independent of management 2. Audit committee members be independent of management Key provisions of SOX (the external auditors) 1. stronger rules regarding auditor independence. audit firms can no longer provide management consulting services to its audit clients 2. Auditors report to the clients audit committee rather than to the clients management team Key provisions of SOX (enforcement) 1. PCAOB (public company accounting oversight board) has the power to regulate auditing firms 2. all accounting firms that audit publicly traded companies must register with the PCAOB and follow its rules Business all activities necessary to provide the members of an economic system with goods and services Understandability information should be comprehensible to those who are willing to spend time to understand it. Relevance capacity of information to make a difference in a decision Faithful Representation is complete, neutral, and free from error Comparability allows user to analyze two or more companies and look for similarities or differences. -compare company one 8/2016 to company 2 8/2016 Consistency allows comparisons within a company from one accounting period to the next. -compare company 1 8/2016 to company 1 8/2015 Materiality the dollar magnitude of the transaction makes a difference in how it is recorded. Does an error in any way affect the judgment of someone relying on the information. Conservatism dont overstate assets or revenues, dont understate liabilities or expenses. Use least optimistic estimate when two estimates of amounts are about equally likely How to analyze profitability Gross Profit Ratio Profit Margin Gross Profit & Ratio ratio of gross profit to sales. Rev - COGS = Gross Profit GP/Sales = GPR Profit Margin Return on sales - ratio of net income to sales. Shows profitability of company. net income/Sales = profit margin How to analyze liquidity Working Capital Current Ratio Working capital current assets - current liabilities Current ratio current assets/current liabilities Assets future economic benefits (resources) owned by or owed to the firm cash current asset MES (marketable equity securities) current asset Accounts Receivable current assets Inventory current assets Supplies (on hand) current assets Prepaid Expenses current assets Land non-current assets Building non-current assets Equipment non-current assets Furniture & Fixtures non-current assets Vehicle non-current assets Accumulated Depreciation non-current assets (CONTRA ASSET) Plant, Property, & Equipment (fixed assets) acquired for use in business rather than resale to customers. Land, building, equipment, Furniture and fixtures, vehicles, AD Intangible Assets lack physical substance, but help to generate revenue Intangible Assets patent, trademark, copyright, franchise, goodwill accounts payable current liability wages payable current liability accrued expense current liability unearned revenue current liability notes payable current liability stockholder equity claims of owners against the net assets of the firm Statement of Cash Flows identifies sources and uses of cash